Markets have rewarded Italy's moves towards budget deal - ECB

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FRANKFURT (Reuters) - Investors have rewarded Italy for signs that it might curb its spending ambitions and reach a deal with the European Commission over its budget plans, European Central Bank Vice President Luis de Guindos said on Thursday.

Italy has been locked in conflict with Brussels over its plans to spend more next year than allowed under European Union rules, raising the prospect of a drawn out battle and sanctions for one of the bloc’s biggest member states.

“I expect that, at the end of the day, the Italian government will reach an agreement with the European Commission,” de Guindos told a news conference. “Adherence and full respect of the rules is something that is key.”

He added that signs of a compromise in recent days had already pushed down borrowing costs and there was now a clear correlation between the prospect of a deal and Italy’s borrowing costs.

“What we have started to see is that there is a clear parallel evolution between the perception of this potential agreement with the Commission and the evolution of the market,” de Guindos said.

“Over the last 3-4-5 days we have seen that these organisations (could) potentially arrive at an agreement and immediately the spreads started to come down,” he added.

Economy Minister Giovanni Tria said on Wednesday that Italy was looking for ways to contain public spending while supporting flagging economic growth in a bid to head off EU disciplinary action.

The comments came less than two days after the government signalled it may be willing to lower its deficit spending plans.

Italian 10-year yields are about 290 basis points above German yields, down from above 325 basis points earlier this month.

De Guindos said any attempt to increase spending is likely to punished by markets and the gain in spending will be offset by higher borrowing costs.